Measuring GDP - NZSNA

Gross Domestic Product (GDP) GDP= the money value of final goods and services produced in an economy in a year. Three ways to measure GDP Production Income Expenditure

GDP An economies standard of living is measured by the number of goods and services that it has available to use and enjoy. An economies growth can be measured by the increase in the number of goods and services it makes Why do you think investment and savings are so important in an economies growth?

Measuring GDP The Expenditure Approach- by adding up selling prices of all goods and services bought in the economy then making allowances for goods and services bought overseas. Formula= C + I + ∆R + G + (X-M) Consumption excludes buying new houses- this is investment Investment includes govt investment (Roading) Change in inventories are included as these represent goods available for sale and represent an increase in investment spending A decrease in stocks will reduce GDP because they represent expenditure on goods that were produced in the previous year.

Measuring GDP The income approach- by adding up incomes generated in the production process. Income includes – wages, salaries (Compensation to employees) – profits, dividends, rents, interest (Gross operating surplus) Then make final adjustments to account for govt intervention. (Add taxes on production e.g. GST and imports e.g. tariffs then takeaway subsidies) Y= C+ S + T

The production approach- measures the value added by producers, by deducting the value of goods and services used up in the production from the total value of goods and services produced. To calculate find the value that each sector/producer adds to the value of the product during the production process. A problem that can occur with this approach is that of double counting. We will focus on the other two approaches Measuring GDP

Find GDP for the following data using the income and expenditure approaches GrowerMillerBaker Wages Intermedi ate goods Sales price Values of output at each stage of Bread production

The expenditure approach= value of the final product = $150 million Wheat GrowerMillerBaker Wages Intermediate goods Sales price The incomes approach totals wages at each stage of production= =$150million

NSNA The New Zealand System of National Accounts (NZSNA) provides an international standard of measure of GDP that enables international comparisons Sometimes there will be a statistical discrepancy in the NSNA this is Basically it is used to make Income and Expenditure approaches balance Statistical discrepancy = Income Approach GDP – Expenditure Approach GDP

NZSNA Terminology Table 6.2 Consumption Investment Government Spending Net Exports Final private expenditure Gross fixed capital formation Government final expenditure Exports of goods and services – Imports of goods and services.

NZSNA Terminology Table 6.2 Wages and salaries Gross Profits Depreciation Net Indirect Taxes Compensation of Employees Operating Surplus Consumption of fixed capital Indirect taxes minus subsidies.

Important things to remember when calculating GDP Include only G&S produced in NZ economy Include G&S produced only within that time period. (inventories included in time period they were made not when they were sold) Avoid double counting (second hand goods not counted)

Questions What is GDP? What is the formula for calculating expenditure on GDP? Draw the simple circular flow diagram With reference to the model explain three ways GDP can be measured Calculate GDP from the data below using the Income and Expenditure methods Item$mItem$m Exports of G$S 4000 Indirect taxes 1000 Compensation employees Imports of G&S 4000 Gross fixed capital formation 2500 Subsidies 800 Private spending Increase in stocks 200 Gross Operating surplus 7500 Government spending 3000